No Way To Run A Business

Wall Street has embraced the idea that companies exist solely to serve the holders of their stock. Under this way of thinking, managers of companies should focus their actions on driving short-term value for their shareholders, and should pay far less (or no) regard to other constituents who may have a stake in the business, such as employees, customers, or members of the community. Shaich partly blames activist hedge funds, many of which buy shares in companies with the aim of pushing their management to make decisions that drive their stock prices up within a few months. According to Shaich, this makes it more difficult to invest in long-term projects, and create sustainable jobs.

In the summer of 2017, Lynn Paine and Joseph Bower, two Harvard Business School professors, published a piece in the Harvard Business Review arguing that the idea that profits are all that should matter to a company’s leadership is a relatively new one. They trace it to an essay by the free-market economist Milton Friedman, which ran in the Times Magazine in 1970. In the piece, Friedman outlined what he called the “Friedman business doctrine,” which holds that ideas of corporate social responsibility, which had become popular in the business world, were undermining the American way of life. “The businessmen believe that they are defending free enterprise when they declaim that business is not concerned ‘merely’ with profit but also with promoting desirable ‘social’ ends; that business has a ‘social conscience’ and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers,” he wrote. Instead, he went on, “They are preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these last decades.” The article caused a sensation, and Friedman’s idea that managers of companies were nothing more than “agents” of shareholders was taken up by economists and business school professors, who helped build it into the dominant attitude in the United States and beyond. In their article, Paine and Bower argue that this theory is “rife with moral hazard.” Stock owners have no public accountability for what the company does, and no responsibility, as executives do, to place the company’s interests above their own. The costs of prioritizing shareholders’ interests are borne by the company, and by society as a whole, which is robbed of innovations, jobs, and tax revenue.